## Facts

- American Automobile Association (AAA) was a nonstock membership corporation that kept books and filed federal income tax returns on a calendar-year, accrual basis.
- In 1952 and 1953, AAA received prepaid annual membership dues covering membership periods that extended into the following year.
- AAA reported as current-year gross income only the portion of dues corresponding to membership months occurring in that tax year.
- AAA treated the remaining portion as deferred or unearned income to be accrued ratably in the next calendar year, based on estimated future service costs.
- The Commissioner of Internal Revenue rejected AAA’s deferral approach and determined that the full amount of dues received during each year was taxable income in that year.
- Deficiencies were assessed; AAA paid and sought a refund. The refund claim was denied, and AAA sued in the Court of Claims, which ruled for the United States.

## Issues

1. Whether, under § 41 of the Internal Revenue Code of 1939, the Commissioner could reject AAA’s deferral method for prepaid membership dues as not clearly reflecting income.
2. Whether prepaid annual membership dues must be included in gross income in full in the year of receipt, despite the taxpayer’s provision of services in later periods.

## Decision

- The Supreme Court affirmed the judgment for the United States.
- The Court held that the Commissioner permissibly rejected AAA’s deferral method under § 41.
- The Court required AAA to include the entire amount of prepaid membership dues in gross income in the calendar year of actual receipt.

## Legal Principles

- Under § 41 of the 1939 Code, if the Commissioner determines that a taxpayer’s accounting method does not clearly reflect income, the Commissioner may require a computation method that, in the Commissioner’s judgment, does so.
- Financial accounting acceptability and long-standing business practice do not control for federal income tax purposes when they conflict with annual tax accounting requirements.
- Prepaid amounts may be taxable upon receipt where the taxpayer’s future performance is contingent and does not constitute a fixed liability tied to the deferred amount.
- Congressional consideration and rejection of statutory authorization for similar deferral practices supported treating such prepaid dues as includible in income when received absent a specific allowance.

## Conclusion

The Court sustained the Commissioner’s authority to require inclusion of prepaid automobile club membership dues in income in the year received, holding that AAA’s accrual-based deferral method could be rejected as failing to clearly reflect income under annual tax accounting.


American Automobile Ass'n v. United States, 367 U.S. 687 (1961)